Coal, ore underpin trade surplus No. 9

Strong coal and iron ore exports have kept the nation’s trade balance in surplus for a ninth consecutive month despite disruptions caused by Queensland floods late last year.

In an unexpectedly strong result, Australian Bureau of Statistics ­figures show the trade surplus was $1.98 billion in December, down almost $100 million from November but still well above market estimates of a $1.6 billion surplus.

But the run of surpluses may have come to an end after extensive flooding in the Bowen Basin last month cut or severely hampered production in most of Queensland’s 59 coalmines.

The sector’s ability to offset the drop in production by drawing on coal reserves is likely to be limited. There is evidence exporters ran down stockpiles late last year to make up for lost output caused by the first round of flooding.

The Australian Bureau of Agricultural and Resource Economics and Sciences estimates coal shipments could be down by about 15 million tonnes as a result of the deluge, which would slice up to $2.5 billion from export earnings between December and March.

Westpac senior economist Andrew Hanlan said most of the shortfall would have occurred in January, which raised the possibility of a trade deficit for the month, though Deutsche Bank economist Phil O’Donaghoe said he would be surprised if that were to occur.

The likelihood that the run of ­surpluses will continue has been increased by the spike in commodity prices last month which, together with the strong currency, pushed the terms of trade to levels not seen in about 60 years.

The December trade balance highlights the massive boost to national income from the resources boom.

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Last year’s nine consecutive monthly surpluses were worth almost $20 billion, underlining Reserve Bank of Australia’s concerns about the scale of the income shock to the economy.

The central bank left interest rates on hold earlier this week, but economists expect more rate rises this year as investment accelerates, lifting employment and increasing the pressure on wages and prices.

Sustained global demand for ­commodities means any flood­-induced trade deficit is likely to be temporary, but views are mixed on how sharp the export rebound will be.

Mr Hanlan expects that after a soft result in January, a 5 per cent increase in the terms of trade will underpin a $4 billion trade surplus for the March quarter – a level it will sustain for much of the year.

But St George Bank senior economist Kate King said the effects of the floods, compounded by cyclone Yasi, would hamper commodity exports for months.

“For a number of mines production is unlikely to restart for a few months as their pits remain full of water," she said. “In addition, it will take some time for key rail to be repaired. Coal hauler
QR National
believes volumes will be down some 20 million tonnes over the first three quarters of 2011."

The trade surplus is also likely to come under increasing pressure from imports as the nation’s massive pipeline of resource-related investments get under way, pushing up purchases of materials, machinery and equipment from offshore.

But the influx of household goods and electronics could increase if a tightening labour market and rising wages encourages households to free up their spending.

There are already signs that consumers are becoming more comfortable about making large purchases. Federal Chamber of Automotive Industries figures show car sales to private buyers jumped 13.6 per cent last month. And embattled retailers are likely to be encouraged by official figures showing that building approvals rose by 8.7 per cent in December, with almost 14,500 new dwellings approved.

Although this was still 5 per cent down from a year earlier, industry analysts think the housing industry is on track for solid recovery in the June quarter.

The managing director of forecaster BIS Shrapnel,
Robert Mellor
, said that although approvals for detached homes were flat, there was strong growth in the apartments, flats and units segment of the market.

Approvals for dwellings other than detached houses soared 21.3 per cent in December, to be up almost 40 per cent through 2010.

Although this segment of the ­market is notoriously volatile, Mr O’Donaghoe said there had been a “distinctively positive trend" in approvals for apartments and units in the past nine months.

Mr Mellor said much of this activity was concentrated in Victoria, whose strength he described as “extra­ordinary".